Office Depot Takes Over OfficeMax to Take on Staples, Amazon (Update1)

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The key to a potential merger and an improving outlook for all players involved centers on store closings, operating synergies and asset disposals, according to industry analysts. Meanwhile, the work of activist funds such as Starboard Value , Office Depot's largest shareholder, may have helped to put the companies in a position to try a merger.

"We believe that a merger has made sense for years and that the recent monetization of key assets provides the necessary cash flow to pay for the integration costs," Gary Balter of Credit Suisse wrote in a note to clients that cites OfficeMax, Office Depot and Staples.

"The synergies will not include higher pricing given the Internet and other pressures, but fewer store locations fighting for sales, lower distribution costs for OMX and ODP, and potential share gains by Staples during the near-term disruption of integrating two disparate systems."

Already, Office Depot is in the process of implementing a three-year plan to cut costs that the company projects will add $300 million to its earnings before interest and taxes. OfficeMax, meanwhile, announced earlier in February it would spin off a controlling stake in its Boise Cascade unit to investors, in a deal that will fetch the company $129 million while retaining a 20% stake in the company's voting stock.

"The merger is expected to deliver $400 million-$600 million in annual cost synergies by the third year following the transaction's close by leveraging both operating and G&A efficiencies, " Office Depot said in a statement.

"With Office Depot and OfficeMax having closed numerous stores in recent years, plus a potential $1 million to $2 million cash cost to close additional stores, we suspect a lot of the future closing opportunities will come as leases come up for renewal," Daniel Binder, an analyst at Jefferies, wrote in a note to clients that forecasts roughly 52% of Office Depot's stores overlap with those of OfficeMax.

Were the merged entity to close or discontinue those stores, Binder calculates Staples could gain up to 30% of those sales, or up to $60 million in revenue annually.

To help pay for the deal, Office Depot may also need to dispose of a joint venture in Mexico.

A potential risk to the deal comes from antitrust authorities including the Federal Trade Commission and Department of Justice .

In 1997, the FTC's head, William Baer, opposed a merger proposal between Office Depot and Staples, citing the prospect of anti-consumer effects such as rising prices. Baer, who now heads the DoJ's antitrust division, is likely to play a key role in evaluating any proposed merger.

Still, the struggles of OfficeMax and Office Depot in recent years may indicate a changed office-supplies marketplace that could push a deal forward.